Invest Like A Farmer is the Wall Street market blog by T. H. RAPKO AND COMPANY, LLC’s managing member Thomas H. Rapko. It presents Tom’s insights and thoughts on the markets. Although the author expresses a view on the likely future performance of certain investment instruments, each individual should carefully consider his or her investment position in relation to his or her own circumstances and with the benefit of professional advice prior to making any investment decisions.

Wednesday, October 9, 2013

The Grand Canyon is...closed?

Indignities of indignities, the Grand Canyon is closed? How is this possible? Resources are being spent to arrest "trespassers" (i.e. U.S. Citizens) hiking in their own National Parks? Yikes! What is a financial farmer to do?

Well for one, we can take a historical look at the other 17 shutdowns for some clue to what has happened in the past. Typically after several days, a compromise is reached and we go back to business as usual.

My major concern is the possibility of escalation. What I mean by escalation is that the government shutdown leads to a default which triggers several possible butterfly effects; but rather than the soft beating wings of a pretty butterfly causing ripple effects in the slightest of air currents, we see a cataclysmic pulse wave.

The way I can best relate to this is with a stock trade gone bad; at first the volume to exit the trade is low, and then everyone wants to get out; the probably being by that time there is no counter-party buyer. If you haven't had a chance yet to read The Crisis of 1837, now would be a good time to check it out.

A default would gravely affect the global financial system. The fact that the largest mutual fund company in the world, Fidelity Investments, has liquidated ALL of their short-term U.S. Government debt is very telling. These are smart people. What is the lowly financial farmer to do? Long-term holdings of the oft-discussed "boring" equities should wait out the storm; inevitably just when things look the worst, there is a recovery. Nonetheless, given my current prediction of a 50/50 chance of the U.S. defaulting, the fact that the National Parks are closed to U.S. Citizens, and other weird behavior on behalf of our government, rounding up some cash is a good idea. Will there be value in that cash? At least initially there should be as it is the de facto standard for conducting trade.

I see several outcomes if we default on the debt, none of them are good. Interest rates will undoubtedly spike (who wants to lend to a deadbeat?), the electronic funds transfer systems may lock up, and probably the most damaging and sustained effect will be a reputation hit to the United States. If things get bad enough, i.e. no Social Security payments, Medicare, etc. I see the situation quickly devolving.

Although we have been given a drop date of Oct. 17th, the reality is probably November 1st, as that will be when a majority of payments will come due. The first chink in the armor was on October 1st, the next test will be on the 17th, and if we don't have some type of resolution by the 1st of November, watch out. As it stands now, considerable political damage has been done to both sides of the aisle, and we're about a week away from triggering some very unpleasant consequences.

PS--A new Chair of the Federal Reserve was announced today; Dr. Janet Louise Yellen. She will be replacing Dr. Ben Shalom Bernanke whose appointment expires in January (assuming we still have a functional government in 2014!)